After two solid up days, we see the potential for a market pause or consolidation of the rally's recent notable gains.
While we still view the extremely negative outlook from investors as a potential upside catalyst, the OB/OS Oscillator, stochastic readings and valuation now suggest a cooling off period.
We would still be buyers on weakness near support.
All Chart Trends Turn Short-Term Bullish
Chart Source: Worden
On the charts, all the major equity indexes closed higher Tuesday with positive NYSE and Nasdaq internals on strong volume.
All closed near their highs of the day (see S&P 500 above) with each closing above resistance with the one exception of the Dow Jones Transports.
We would also note the Midcap 400 joined the DJIA in closing above its 50-day moving average.
Thus, we find all the index charts now in near-term uptrends.
Market cumulative breadth saw improvement as well with the A/Ds for the All Exchange and NYSE turning positive as the Nasdaq stayed neutral.
On a cautionary note, the stochastic levels are now well into overbought territory. They have yet to generate bearish crossover signals but should be monitored closely.
McClellan OB/OS Oscillators & Stochastic Levels Suggest Pause/Consolidation
The data find the McClellan Overbought/Oversold Oscillators are now on warning signals as all are now overbought (All Exchange: +90.61 NYSE: +99.70 Nasdaq: +86.08).
The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 46%, staying neutral.
The Open Insider Buy/Sell Ratio dropped to 38.4, also staying neutral.
The detrended Rydex Ratio (contrarian indicator) continues its extremely bullish signal as it rose slightly to -3.29. We reiterate that the ETF traders continue to have historically leveraged short exposure, coincident with market lows and create the probability of becoming a bullish catalyst when they are forced to cover, in our opinion.
This week's AAII Bear/Bull Ratio (contrarian indicator) dipped to 2.49 but remains near a level of bearish sentiment only surpassed twice in the past two decades, those times being during the banking crisis in 2009 and the Covid pandemic in 2020.
Also, this week's Investors Intelligence Bear/Bull Ratio (contrary indicator) was 40.3/31.3 and remains bullish.
S&P 500 Valuation Stretches
The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 dipped down to $229.58 per share. As such, its forward P/E multiple is 16.8x and at a premium to the "rule of 20" ballpark fair value of 15.9x.
The S&P's forward earnings yield dropped below 6% to 5.95%.
The 10-Year Treasury yield closed lower at 4.11%. We view support as at 3.85% with resistance at 4.43%.
Our Market Outlook
The strong recent gains on the equity charts are now, in our opinion, likely to see a pause/consolidation of said gains given the OB/OS and stochastic levels while valuation has become a bit stretched. We continue to suggest buying on weakness near support is appropriate.